Dollar slides as risk appetite picks up ahead of U.S. holiday

NEW YORK (Reuters) - The dollar fell on Tuesday in thin pre-holiday trading, as investors consolidated recent gains and focused less on trade tensions, raising the market’s risk appetite and prompting some flows into other currencies such as the euro and Australian dollar.

FILE PHOTO: U.S. dollar and Euro banknotes are seen in this picture illustration taken May 3, 2018. REUTERS/Dado Ruvic/Illustration - RC1FE38CB160/File Photo

Ahead of the U.S. Independence Day holiday on Wednesday, market sentiment also improved after the Chinese central bank moved to calm currency markets following a fall in the renminbi below a key psychological level.

In a statement on the website of the People’s Bank of China, Governor Yi Gang said the central bank was closely watching fluctuations in the foreign exchange market and would seek to keep the yuan at a stable and reasonable level.

“That sentiment may have helped risk appetite a little...but the U.S. July 4th holiday and the July 6th start of U.S.-China trade tariffs are serving to keep FX investors on the sidelines for now,” Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said.

In China, protracted weakness of its currency raises the prospects of capital outflows and a slowdown in the world’s second-biggest economy, creating a new source of concern for currency markets grappling with rising threats to global trade.

The PBOC’s comments snapped a 10-day losing streak in the renminbi, falling nearly 4 percent against a trade-weighted basket and about 4.5 percent against the dollar over that period.

In afternoon trading, the dollar was down 0.4 percent against a basket of at 94.604, after notching up three consecutive months of gains. Investors are awaiting the release of the Federal Reserve’s June meeting minutes on Thursday and Friday’s U.S. jobs data for validation of policymakers’ forecasts for two more rate hikes this year.

Valuations also remain supportive of the dollar, with its trade-weighted basket still below long-term averages.

“We do not expect near-term political or monetary policy outcomes to work against the prevailing U.S. dollar strength story,” said Shahab Jalinoos, global head of FX strategy, at Credit Suisse in New York.

“As for Friday’s payrolls data, it would take a large miss on the average earnings expectation to move the dial, in our view,” he added.

The euro, meanwhile, rose after Germany’s coalition settled a row over migration that had threatened to topple Chancellor Angela Merkel’s government. The single currency was last up 0.2 percent at $1.1655.

The Australian dollar, sensitive to developments in China because it is a key buyer of Australian commodity exports, were up 0.5 percent at US$0.7376.